For a brief, shining moment, there was convergence. Now there’s confusion.
The bond market isn’t taking any chances. Yes, deflation’s a risk, but judging by the sentiment among traders in government IOUs, expectations appear to moving ever so toward the bias that the Fed will be successful in its question to elevate inflation from the grave.
The jury’s still out on that score, at least in terms of timing. And that may make all the difference if you’re a trader. In any case, the 10-year Treasury Note closed above 3% on Friday, an act of defiance to conventional wisdom that we haven’t seen since November, according to numbers from the U.S. Treasury’s web site. Meanwhile, the yield on the 10-year inflation-indexed Treasury has inched lower, staying below 2.0% since early January. The result: inflation expectations are on the rise, moving above 1% this month for the first time since October.
For the moment, the opportunity to buy a 10-year TIPS at virtually no extra cost over its conventional counterpart looks like a train that passed by. As we’ve discussed, hopping on board the train when it was in the station looked like a no-brainer to some degree, in part because such events rarely happens. Indeed, it’s not supposed to happen. Mere mortals are supposed to pay extra for the privilege of hedging future inflation. If you’d rather not, conventional Treasuries will suffice, albeit at the risk of ending up on the losing side of higher future inflation, if any—the bane of unhedged fixed-income securities everywhere.